Last week, Standard & Poor's Ratings Services (S&P) upgraded the rating outlook on Huntington Bancshares Inc. (HBAN) to “positive” from “negative”. The upward revision in rating outlook was based on the company’s improved credit conditions.
S&P has affirmed the counterparty credit rating of Huntington at "BB+/B". Additionally, its banking subsidiary Huntington National Bank’s "BBB-/A-3" counterparty credit rating was also affirmed. However, the "B" and "A-3" short-term ratings on the holding company and its subsidiary were removed on request by the company.
After several quarters of loss, Huntington Bancshares reported a profit of $39.7 million or 1 cent a share in the first quarter, helped by a tax benefit of $38.2 million. Excluding the benefit, the company reported a loss of 4 cents per share, well ahead of the Zacks Consensus Estimate of a loss of 15 cents.
The better-than-expected results were primarily driven by a significant improvement in credit quality, as well as a reduction in net charge-offs and loan loss provisions. Additionally, the company experienced a decent increase in interest margin.
Credit metrics significantly improved during the quarter. Provision for credit losses was $235.0 million, down 74% sequentially and 19% from the year-ago quarter. Net charge-offs were $238.5 million, down 46% sequentially and 30% year over year. Total nonperforming assets as of March 31, 2010, were $1.9 billion, down 7% sequentially, driven primarily by a 52% decline in new nonperforming assets.
According to the rating agency, the improvement in credit quality and profitability at Huntington is expected to persist this year; therefore, a lessening of pressure on capital levels is expected.
We believe that the turnaround story is right on track at Huntington. Under its new leadership, the company has taken fundamental steps including the strengthening of capital levels, reorganization of business and shoring up of its balance sheet. We expect these actions to help Huntington navigate the current credit cycle and support earnings growth going forward.
However, Huntington’s growth is threatened by the profound economic weakness in its footprint. The company has significant exposure to commercial real estate and residential markets. It continued to incur huge losses in commercial real estate and even though credit quality is improving of late, credit metrics are expected to remain at elevated levels in the near term, given the economic weakness in its markets.
Huntington Bancshares is currently rated as Zacks #3 Rank (Hold), implying that the stock is expected to perform in line with the broader U.S. equity market over the next one to three months. The stock has a long-term Neutral recommendation from us.